Wednesday, February 6, 2008

Expect strong revenue growth with continued pressure on gross margins due to an increasingly competitive market. Content data services of the type Akamai provides are in high demand. Internet video is unquestionably creating a good tailwind for them. I have no edge on the quarter itself. I'm a little concerned as they've been seeing a deceleration in revenue growth and a reduction in operating margin so far this year. If they hit consensus numbers for the quarter, it will be the first time in the last 3 years their year over year sales in Q4 will be slower than their year over year sales in Q3 and the first time they'll have single digit sequential growth for Q4. Revenue estimates are pegged at around $175mm for the quarter. Street consensus is looking for mid single digit revenue growth for next quarter. If you don't see beats on revenue for the current quarter and guidance, the stock is likely to get pummeled. Gross margins will be a closely watched metric as it's the trapdoor in the model right now – the street seems to be using roughly 74% as an estimate. The more important metric, or the hinge factor, is EBITDA margin, estimated at about 46.3%, which is theoretically a better gauge of their ability to monetize growth.

The big issue with the stock is if they hit numbers, the company is still decelerating pretty quickly overall. I would expect that as internet video continues to pick up steam and streams, growth rates will stabilize. Until that happens this stock is risky despite their attractive positioning in the content delivery market.

Here's the chart.

Looks to me like its got some kind of support at $26 an area of attraction at $32.3 and resistance at $34. Here at $31, re-reading what I wrote, it seems like there's a better shot at making money in the stock on the short side as opposed to the long side into the quarter.